Research Reports

Updated April 4, 2005 12:01 a.m. ET

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The following companies are subjects of research reports issued recently by investment firms. Many of the reports may be obtained through the company research area of The Wall Street Journal Online at WSJ.com, or are available through Factiva.com. Share prices at the time the report was issued and the date of the report are in parentheses. Some of the reports' issuers have provided, or hope to provide, investment-banking or other services for the companies being analyzed.

CapRock Energy
(RKE-AMEX) by J.M. Dutton (24.80, March 30) Cap Rock registered a small loss for the fourth quarter of 2004. For nine months ended Sept. 30, 2004, Cap Rock's reported net income before taxes was $6.2 million, compared to net income before taxes of $3.3 million for the entire year 2004. Cap Rock again addressed the ongoing rate case before the Public Utility Commission of Texas in its 10-K filing. We recognize the many uncertainties facing Cap Rock due to the PUCT rate case...We reiterate our Speculative Buy rating based on the longer term history of growth, the strong balance sheet, cash per share of approximately $13, and Cap Rock's stated intention to consider a dividend and a possible equity offering after resolution of uncertainties. Since the first of the year 2005, Cap Rock's common stock has traded in a range of $28.12 to $24.70 on relatively low volume of 1,100 average daily shares.

EastWest Bancorp
(EWBC-NNM) by Sandler O'Neill (37.54, March 30) We are initiating coverage of EWBC with a Hold rating and a 12-month-price target of 39. Including the 1% dividend yield, this suggests a 7% total return.

East West Bancorp is the third-largest bank in the country that specializes in serving the Chinese ethnic community. The company has $6 billion in assets and 49 branches in California, and a representative office in China. Given the above-average growth prospects of the Chinese-American niche, East West premium multiple is well-deserved. However, we remain cautious since the stock is trading near historic highs and above its long-term growth rate. We expect earnings-per-share growth to be driven by margin expansion and continued strong balance sheet growth. EPS targets: We look for East West to report EPS of $1.85 in 2005 (above management's $1.76 to $1.78 target), and a 26% year-over-year increase. In 2006, we project earnings of $2.25, slightly more than a 20% increase...essentially in line with consensus. Our 39 price target assumes EWBC shares will trade at 17.5 times 2006 earnings, or a 20% to 25% premium to the average community bank and essentially in line with our 18% long-term EPS growth target. Risks include deterioration in credit quality; short-term interest rates declining; and international business risk.

Marriott
(MAR-NYSE) by Bear Stearns (66.62, March 30) Sale of Courtyard joint venture interest a positive: MAR announced the completion of the previously reported sale of a 75% interest in the 120-property (about 17,550 rooms) Courtyard Joint Venture to an institutional investor. In 2000, MAR invested $300 million for its 50% interest in the JV ($100 million in equity and $200 million in mezzanine debt). With this transaction, MAR has been repaid $269 million, including debt and accrued interest. MAR expects to record a gain on this repayment; however, the gain should be offset by prepayment costs incurred on a senior loan currently held by the JV. Net-net, no gain or loss on the transaction. MAR will continue to operate the JV properties under a new long-term management agreement. Further, MAR has offered to extend a loan of up to $129 million to the JV. This loan would be made available to complete renovations at 64 hotels in 2005 and early 2006 (56 hotels in the portfolio have already been renovated). We view this transaction as a positive for MAR...We reiterate our Outperform rating on MAR based on: 1) its leverage to improvements in industry profits via its incentive management fees, 2) steady unit growth of 20,000 to 25,000 rooms per year in 2005 and 2006, 3) strength in its timeshare business, and 4) growing free cash flows. MAR reports 1Q05 earnings on April 21, 2005.

Tanox
(TNOX-NNM) by First Albany (9.76, March 30) We are maintaining our Buy rating following Tanox's acquisition of a development-stage drug for the treatment of acute lung injury (ALI) and acute respiratory distress syndrome (ARDS). Tanox will pay Sunol Molecular (private) 800,000 shares of newly issued common stock and $6 million in cash to acquire a monoclonal antibody antagonist of tissue factor. The antibody, renamed TNX-832, is in a Phase I/II, dose-escalation trial in ALI/ARDS, expected to conclude in second half of 2006. Adjusting for higher anticipated research-and-development spending, we are lowering EPS estimates to (44 cents) from (23 cents) in 2005 and to 9 cents from 10 cents in in 2006, while our 2008 estimate is unchanged. Our price target is 18, based on estimated 2008 EPS of 85 cents, a 40 price-earnings ratio, and a 25% risk discount.

Watchguard Technologies
(WGRD-NNM) by McAdams Regan Wright (3.15, March 31) WGRD reported 4Q04 results: Revenues of $19.3 million (down 2% year-over-year) and a loss per share of 8 cents were below our expectations of $20.7 million and ($0.04), respectively. Considering that the company delayed its 4Q04 release twice and had issued a press release stating that revenues for the first three quarters were overstated by $1.8 million, there was a fair amount of uncertainty in our estimates. Product-unit shipments were down roughly 11% quarter-over-quarter...[but] management believes that sell-through was flat-to-slightly up quarter-over-quarter....Operating expenses of $15.4 million (up 8.5% quarter-over-quarter) were inflated somewhat by $600,000 in restructuring costs and $400,000 in year-end auditing expenses. On the bright side, the company generated positive cash flow from operations, ending the quarter with $79.8 million in cash and short term investments ($2.35 a share). The cash balance dropped by just over $100,000 from the end of September. After discovering revenue-recognition issues, the company restated results for the first three quarters of 2004 -- lowering them by a reported $1.8 million (comparing the restated figures from the 10-K filed last night, revenues were actually reduced by $2.2 million from the previously filed 10-Qs). Buy.

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